Exchange-traded funds have become one of the most popular ways for Australians to invest. Here’s what you’re actually buying when you buy an ETF.
An exchange-traded fund, or ETF, is an investment fund that you can buy and sell on a stock exchange, just like a share.
Instead of owning one company, an ETF owns a basket of investments. Buying a single unit of an ETF that tracks the ASX 200, for example, gives you a small slice of all 200 companies in that index in one trade.
ETFs are listed on the ASX and other exchanges, so they can be bought through any share trading account during market hours, at a price that moves throughout the day.
Many ETFs are “passive”. They don’t try to pick winners; they simply hold the investments in a particular index, in the same proportions. Because there’s no team of analysts choosing stocks, passive ETFs usually charge low fees, and for a big index fund the yearly fee can be a small fraction of 1 per cent.
There are now ETFs for almost everything: Australian and global shares, specific countries and industries such as technology or healthcare, bonds, gold and other commodities, and even funds that hold Bitcoin. Some are “active”, with a fund manager choosing the investments, which usually means higher fees.
ETFs versus shares and managed funds
The big appeal of an ETF is diversification. Owning one company means your money depends on that one business. Owning an ETF spreads it across many, so a single company’s bad news has less effect.
Compared with traditional managed funds, which are bought and sold directly through the fund manager, ETFs are usually cheaper, easier to trade, and show exactly what they hold.
But ETFs aren’t risk-free. An ETF tracking the sharemarket will fall when the sharemarket falls. Funds that focus on a single industry or theme can be far more volatile than a broad index fund. And some more complex products use borrowing or derivatives, which can magnify losses.
Investors also pay brokerage each time they buy or sell, so frequent small trades can eat into returns. Many people invest in ETFs regularly over long periods, which smooths out the ups and downs of buying at different prices.
Before investing, it’s worth reading the fund’s product disclosure statement, checking its fees and what it actually holds, and considering whether it suits your goals. A licensed financial adviser can help with your own situation.
